Integrated management systems and firm profitability: Multi-way fixed-effects evidence from Pakistani manufacturing firms

Abstract

In an increasingly competitive and sustainability-driven business environment, manufacturing firms are under growing pressure to enhance profitability while maintaining high standards of quality, environmental management, and workplace safety. Integrated Management System (IMS), which combines ISO 9001, ISO 14001, and ISO 45001 standards, offers a comprehensive framework to achieve these objectives. The main aim of this study is to analyze the effect of IMS implementation on the profitability of manufacturing firms. To accomplish this objective, multi-way fixed effects regressions are applied to firm-level panel data. The study employs three alternative measures of firms’ profitability, namely, return on assets (ROA), net profit margin (NPM), and return on equity (ROE). The empirical results reveal that firms with IMS exhibit, on average, 2.3 percentage points higher ROA than firms without IMS. Similarly, the NPM of firms with IMS is, on average, 6.1 percentage points higher than that of firms without IMS. These findings indicate that the adoption of IMS significantly enhances the firms’ profitability. However, IMS has a statistically insignificant effect on ROE, indicating that it does not significantly influence shareholders’ returns. Other explanatory variables, including firm size, asset turnover, and export intensity, also positively affect ROA and NPM. Conversely, firm age has a negative effect on three profitability indicators. Market share is positively associated with ROA and ROE. Furthermore, long-term debt and interest expenses adversely affect the firms’ ROA. Findings of this study will benefit manufacturing firms’ management and policymakers by helping them to understand how IMS enhances profitability in the manufacturing sector.